As we approach the end of the tax year, now is the time to review your tax affairs. You can ensure that you have taken advantage of all reliefs available to you. You can consider a few tax planning opportunities to help reduce your tax bill.
This blog covers some of the key topics you might find useful when it comes to getting your taxes in order for the coming year.
For 2020/21, the tax-free personal allowance is £12,500. The next £37,500 is taxed at the basic rate of 20% (7.5% for dividend income).
Higher rate tax of 40% (32.5% for dividends) is charged on income above £50,000. The additional rate tax of 45% (38.1% for dividends) is charged on income above £150,000.
The personal allowance is reduced by £1 for every £2 of income above £100,000.
Transferring income yielding assets, or an interest in those assets, to a spouse or civil partner ensures both parties have income to use up relevant allowances. Take advice before doing this as there may be other tax implications.
Note that dividends are treated as the top slice of income. The basic and higher rates are first allocated against other income.
Tax Favoured Investments
Individual Savings Accounts (ISAs) are an excellent investment for higher rate taxpayers. The maximum allowance is £20,000. You must save or invest by 5 April for it to count for that year. If you don’t use the allowance it is lost.
The ISA family has grown considerably since its inauguration in 1999, with a further five ISAs to consider:
- Help to buy ISA
- Inheritance ISA
- Lifetime ISA (LISA)
- Flexible ISA
- Innovative Finance ISA
Enterprise investment schemes and seed EIS Shares
Tax relief is available where you subscribe for shares qualifying for Enterprise Investment Schemes (EIS) or Seed EIS (SEIS) relief.
Under the EIS scheme, your tax liability for the year may be reduced by up to 30% of the sum invested. In addition, capital gains from disposals in the previous 36 months or following 12 months may be reinvested into EIS shares, resulting in a deferral of the gain.
Income tax relief is given at the rate of 50% of the sum invested. Relief may be given against tax in 2019/20 or 2020/21.
Venture Capital Trusts
Venture Capital Trusts (VCT) are specialist tax incentivised investments that enable individuals to invest indirectly in a range of small higher risk trading companies and securities.
Up front income tax relief at 30% of the amount subscribed. This is subject to a maximum investment of £200,000 per tax year. The investment must be held for a minimum of five years in order to retain the income tax relief.
Family Investment Companies
Family Investment Companies (FIC) can be a useful way to protect family wealth. The most appropriate structure will depend on the family’s circumstances and objectives. An FIC enables parents to retain control over assets whilst accumulating wealth in a tax efficient manner and facilitating future succession planning.
Gains in an FIC are taxed at 19%, compared to most individuals and trustees who pay up to 28%.
Any investment gains and income could be paid into a pension plan for the benefit of the shareholders.
From 6 April 2016, the standard annual allowance (AA) of £40,000 for pension contributions (the total of personal and employer contributions) was reduced by £1 for every additional £2 of an individual’s ‘adjusted income’ over £150,000.
This could still affect you if your income from all sources was over £110,000. However, from 6 April 2020, the thresholds were increased and the reduction only applies if an individual’s ‘adjusted income’ is over £240,000. This can still affect you if your income from all sources is over £200,000.
Lifetime Allowance Considerations
Although funds invested within a pension can grow tax free, there is a limit (the lifetime allowance – LTA) on the total amount you can hold in a pension pot. Funds in excess of the limit will suffer penalty tax charges when you start to take pension benefits. The LTA reduced from £1.25m to £1m from 6 April 2016.
Stakeholder pensions allow contributions to be made by, or for, all UK residents, including children and grandchildren from birth.
Consider making a net contribution of up to £2,880 (effectively £3,600 gross) each year for members of your family, even for those who do not have any earnings.
The earlier that pension contributions are started, the more they may benefit from compounded tax-free returns.
Flexible access from age 55
Pension investors aged at least 55 (rising to 57 from 2028) will be able to access their pension fund as a lump sum if they wish. The first 25% will be tax free and the rest will be treated as taxable income and will be subject to
income tax at their marginal income tax rate.
You can also choose to take your pension in smaller lump sums, spread over time, to help manage your tax liability.
Reviewing your retirement plans
The new rules give considerable freedom of choice. Under the new rules, whilst nobody will be forced to buy an annuity at any age, those who wish to do so can at present. This may prove to remain the most appropriate solution for some people.
Your pension pot – a tax efficient way of keeping it in the family
Important changes are also taking place with regards to how pensions are treated in the event of your death.
Retaining pension wealth within the pension fund and passing it to future generations is now an extremely tax efficient estate planning solution. It combines inheritance tax (IHT) free inheritance with tax free investment returns and potential tax-free withdrawals.
From April 2015, you can nominate who inherits your pension fund. It can be anyone of any age and is no longer restricted to your ‘dependents’.
Enhanced Tax Reliefs
Small and medium sized enterprises (SMEs) are given an enhanced deduction against tax of 230% of the actual eligible costs incurred. They also have the chance of actual cash refunds in loss making situations.
For large companies, the basic tax relief is an “above the line” taxable credit of 13% from 1 April 2020 (12% from 1 January 2018 to 31 March 2020) of qualifying expenditure.
In some cases, small or medium sized companies may be able to claim under the large company scheme if they are precluded from the relief available to small and medium sized companies.
Creative sector tax reliefs are a growing suite of special tax breaks that are being made available. Examples of this include films, animation programmes, high end TV programmes, video games, theatres, orchestras and museum and gallery exhibitions.
There are detailed and differing conditions for each of these potential reliefs. Companies should seriously consider these in order to not miss out on possibly significant tax reliefs.
For further advice on any of the topics covered, get in touch with one of our team.
The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.
The value of investments can go down as well as up and you may not get back the full amount you invested.